Here’s why BAE Systems shares and FTSE 100 oil shares surged today

As I write today (October 2), blue-chip FTSE100 the index increased by only 0.24%. However, some Footsie stocks are performing better. For example, shares of a defense giant BAE systems (LSE: BA.) rose 2.5%. This means that the company’s shares rose almost 6% in just the first two days of October.

Elsewhere, Shell AND BP increased by a similar amount today. However, unlike BAE, which is up 17% year-to-date, stocks of these two crudes will continue to decline by double digits in 2024.

The price of black gold has skyrocketed

The reason for today’s increase is that the conflict between Israel and Hamas is now unfortunately escalating into a broader regional conflict. Last night, Iran launched missile attacks on Israel, while the Israeli army and Iran-backed Hezbollah are currently fighting on land in Lebanon.

This significant escalation has rattled oil markets, raising fears that the deepening conflict could disrupt crucial supplies of Middle Eastern oil to global markets. As a result, this resulted in an increase in the prices of oil and related stocks.

Higher oil prices would obviously be good for both Shell and BP’s bottom line.

A more dangerous world

As wars escalate and geopolitical tensions increase, it also drives up the stock prices of defense contractors. With a market capitalization of £39 billion, BAE Systems is one of the largest defense companies in Europe.

Outside the Middle East, there is also an ongoing war in Ukraine, while U.S.-China relations are at their worst point in decades. Given all this, nations around the world are strengthening their defenses.

We can see the impact this has had – and except where it is – it is having an impact on BAE’s revenues and profits.

Year	2022	2023	2024 (forecast)	2025 (forecast)
Total income	£21.25 billion	23.07 billion pounds	28.22 billion pounds	30.47 billion pounds
Net profit	£1.59 billion	£1.85 billion	£2.04 billion	£2.28 billion

The company has a wide range of products, ranging from submarines to ground vehicles. It operates on land, in the air, at sea, in space and in cyberspace, making it a key player in many defense sectors.

In the first half, the order book rose to a whopping £74.1 billion, up from £69.8 billion a year earlier. Last year, the company increased its payout by 11% and the dividend yield is currently 2.4%.

Looking ahead, one of the risks for BAE will be delays in product development due to a lack of available skilled workers. Additionally, repairing manufacturing defects in any key product (e.g., fighter jets or submarines) could prove costly and impact profits.

Defense in my own portfolio

A few years ago I bought shares of BAE Systems at a much lower price. The main reasons were the increasingly divided world we live in and rising military spending.

However, another motivation for me was that I wanted these types of defensive stocks to provide my portfolio with a hedge against any geopolitical volatility.

As Charu Chanana, director of FX strategy at Saxo Bank, recently noted: “In an era where geopolitical shocks are a constant threat, positioning your portfolio for resilience isn’t just smart – it’s essential“

While I love the tech stocks in my portfolio, stocks like BAE prove their value in uncertain times like today.